Don't Rush to Pay
Off the Mortgage
By
Kimberly Lankford
June 4, 2004
I have 20 years or so until I retire and have 23 years to go on our mortgage. My interest rate is 5.5%, which is phenomenal, but I have this serious urge to pay this mortgage off as quickly as possible. Everything I read points to investing in lieu of paying off my mortgage early. What is your opinion?
So many issues to consider! With interest rates so low, the benefits of paying off your mortgage early aren't quite as great as they had been in the past -- especially considering that a 5.5% rate actually costs most people around 4% thanks to the tax deduction for interest.
"Although you cannot get that return from a money-market fund, you should be able to earn at least that amount on other investments given historic returns on stocks over a period of time -- and he has time before he retires," says Alexandra Armstrong, a certified financial planner in Washington, D.C.
Before increasing your mortgage payments or investments, though, make sure you don't need to use the money anywhere else. You should definitely pay off any high-interest (and nondeductible) credit card debt and any other higher-interest loans first.
Then make sure your investments are diversified so you don't tie up too much of your money in your house. Keep in mind that a mortgage gives you leverage. You'll still benefit from 100% of the gains, even if you only put down a small percentage of the house's value. Also invest in your 401(k) at least up to the employer match and max out your Roth IRA contributions if you qualify. Because you have 20 years until retirement, you should keep plenty of your money in a diversified portfolio of stock funds. See our long-term fund portfolio for some recommendations.
Finally, keep some cash accessible in a money-market fund for emergencies. Money you invest in your house isn't nearly as liquid. Although you can borrow it through a home-equity loan but the rates might be higher by the time you need it.
In the end, however, your decision depends a lot on your comfort level. "The emotional issue of wanting to pay off a mortgage early cannot be quantified," says Joslyn Ewart, a certified financial planner in Ardmore, Pa.
One way to meet both goals: Keep investing elsewhere but also boost your mortgage payments. "I would also look at making an extra payment or two each year to greatly reduce the amount of years on the loan," says Judson Gee, a certified financial planner in Charlotte, N.C. Check out our How Advantageous Are Extra Payments? to see how much you can save.
And if you have enough money to continue making larger payments, see if you can lower your rate even further by refinancing to a 15-year mortgage -- so your house will be paid off several years before you retire.